6 Reasons Why Coty Is No Longer A Buy At BMO

Beauty company Coty Inc (NYSE: COTY) reported fiscal fourth-quarter earnings Monday that prompted BMO Capital Markets to downgrade the stock on fears the company will miss its fiscal 2019 guidance.  

The Analyst

BMO's Shannon Coyne downgraded Coty from Outperform to Market Perform with a price target lowered from $18 to $12.

The Thesis

Coty guided its fiscal 2019 EPS to a range of 74-78 cents in its earnings report, but six factors suggest the company may fall short of its estimates, Coyne said in the downgrade note. (See the analyst's track record here.) 

They are: 

• Supply chain disruptions seen in Q4 may take longer to fix and make it difficult to determine the health of the company versus transitory execution problems.
• The overall mass beauty market in the U.S. is declining by a low single-digit rate, but new independent brands are gaining share.
• Coty still needs to clear out old inventory and is doing so through increased promotions, and a full reset with new packaging isn't expected until December.
• Management said it will re-invest $90 million from a $150-million cost saving initiative, but this figure is likely to come in higher.
• Traction is being seen with beauty influencers but is unlikely to reap any notable benefits until the second half of the fiscal year.
• Debt levels remain high, with a current net debt/adjusted EBITDA multiple of 5.27 times. The figure should improve to 4 times by 2020, but still gives management minimal options for accretive M&A deals.

Price Action

Coty shares were trading up 2 percent to $11.75 at the time of publication Wednesday. 

Related Links:

Coty Q4 Earnings Preview

Deutsche Bank: 4 Reasons Why Coty's Stock Is No Longer Attractive